For insured and self-insured private health services plans (PHSPs), what are the tax consequences if not all or substantially all of the actual amounts paid under the plan are for medical expenses that are eligible for the medical expense tax credit (METC) – and do different considerations apply to a self-insured health care spending accounts (HCSA) which sets a ceiling on the amounts that can be claimed under the plan? CRA stated:
An insured plan (employer pays premiums under a contract of insurance) will generally be considered to be a PHSP if all of the expenses covered under the plan are medical expenses or connected expenses, and “all or substantially all” (generally 90% or more) of the premiums paid under the plan relate to medical expenses that are eligible for the METC. The actual benefits paid to employees in the year are not considered … .
As an example, CRA indicated that an insurance plan would meet the above test notwithstanding that only 88% of the benefits paid were METC-eligible if over 90% of the premiums paid related to coverage for METC-eligible expenses.
In the case of a self-insured plan, the test is one of whether all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses. The employees’ allocation of the ceiling amount to the various expense categories is not considered, so that in the HCSA example, if the portion of the benefits paid in the year for METC-eligible benefits was, say, 92%, it would not matter that the total ceiling amounts allocated to METC-eligible expenses was only 80%. In the rare case where each HCSA was determined to be a separate plan, this same test would be applied on a plan-by-plan basis.